Written by Hyunjoo Jin, Norihiko Shirozo, and Ben Klayman
(Reuters) – Tesla Inc has canceled a long-promised cheap car that investors had relied on to propel its growth into a mass-market automaker, according to three sources familiar with the matter and company letters seen by Reuters.
The automaker will continue to develop a self-driving robotaxi on the same small vehicle platform, the sources said.
The decision represents an abandonment of a long-standing goal that Tesla CEO Elon Musk has often described as its core mission: affordable electric cars for the masses. His first “master plan” for the company in 2006 called for making luxury models first, then using the profits to finance a “low-cost family car.”
Tesla shares fell 6% in late morning trading after the Reuters report.
Since then, Musk has repeatedly promised such a car to investors and consumers. Last January, Musk told investors that Tesla plans to begin production of the affordable model at its Texas factory in the second half of 2025, after an exclusive Reuters report detailing those plans.
Tesla's current cheapest model, the Model 3 sedan, sells for about $39,000 in the United States. The now-defunct entry-level car, sometimes described as the Model 2, was expected to start at around $25,000.
Tesla did not respond to requests for comment.
This stark reversal comes at a time when Tesla faces fierce competition globally from Chinese electric car makers who are flooding the market with cars priced up to $10,000. The self-driving robo-taxi plan, which could take longer to implement, presents a tougher engineering challenge and greater regulatory risk.
Two sources said they learned of Tesla's decision to cancel the Model 2 at a meeting attended by dozens of employees, one of whom said the gathering occurred in late February.
“Elon’s directive is to use a fully automated taxi,” that person said.
The third source confirmed the cancellation and said new plans call for producing robotaxis, but in much smaller quantities than expected for the Model 2.
Several company messages reviewed by Reuters about the decision included a March 1 letter from an unnamed program manager for the affordable car discussing the project's demise with engineering staff and advising them to stop telling suppliers to “cancel the program.”
A fourth person familiar with Tesla's plans expressed optimism about the decision to move away from a cheap car strategy in favor of robotaxis, a sector that Musk has envisioned as the future of mobility. The source warned that Tesla's product plans may change again based on economic conditions.
Making profits from entry-level vehicles is a challenge for any automaker. But Tesla's delay in pursuing the car that Musk once called his dream has made it more difficult because it now faces much greater competition in that price range.
While Tesla spent years developing its experimental Cybertruck, an expensive electric pickup, Chinese automakers have rushed forward to produce affordable electric vehicles, seizing market share, gaining economies of scale, and offering consumers bargain prices that other automakers have struggled with. Western cars to match.
As Chinese electric cars rise to challenge Tesla's dominance, Musk has been tending to his sprawling empire, which includes rocket maker SpaceX, brain chip developer Neuralink, and social media giant X, which Musk acquired in 2022. The platform formerly called Twitter has faltered. Under Musk's erratic management, it lost most of its value as the company lost revenue and advertisers.
Plans for an affordable Tesla are seen as key to achieving Musk's stratospheric sales growth ambitions. Musk said in 2020 that Tesla aspires to sell 20 million cars by 2030, which is twice what the world's largest car manufacturer, Toyota, sells today. With the Model 2 dead, it's not clear how it will get there.
The forecast for a $25,000 car boosted Wall Street analysts' more modest, but still ambitious, expectations for Tesla sales. These forecasts, according to Tesla's investor relations document, call for car sales to rise to 4.2 million by 2028 from 1.8 million last year.
Musk has hesitated about the project before. In a biography of the entrepreneur released last year, author Walter Isaacson reported that in 2022 Musk had “paused” plans for entry-level electric cars, arguing that a Tesla robotaxi would make the car irrelevant. The book said that Musk's advisors urged him to continue on this path.
“Stop all additional activities”
Tesla called the affordable car project NV91 internally and H422 externally when discussing it with suppliers, according to two sources and company communications reviewed by Reuters.
Letters from Tesla's unnamed program manager to employees referred to those code names in discussing ending the project. “Suppliers must cease all further activities related to H422/NV91,” one of those letters, sent on March 1, said.
The sources said that they do not know all the reasons behind the decision to stop the project.
In another letter dated March 1, the director thanked the engineering staff for their efforts and urged them to document what they had learned.
“I would like to thank everyone for all their hard work and dedication to going above and beyond and implementing the best design possible under the strict restrictions we had to work under,” the message read. “We don't want all our hard work to go to waste, so it's important that we connect and document things properly.”
Messages showed the cancellation of meetings related to the affordable car project. The two sources said that some engineers had been reassigned.
Tesla's timeline and business model for robotics remain unclear. Musk has publicly predicted a future of mobility in which self-driving taxis could eventually become a more popular mode of transportation than human-driven cars. He said Tesla, the world's most valuable automaker, would be “worth zero” without achieving full self-driving capability.
Currently, self-driving cars have only been approved by US and Chinese regulatory agencies for very limited experimental use on public roads.
Tesla has yet to prove it can produce a self-driving car despite years of Musk predicting that was just around the corner, a prediction partly fueled by Tesla's high valuation. The automaker faces lawsuits and investigations into crashes involving its self-driving driver assistance and full self-driving systems, which are not fully autonomous. Tesla blamed these accidents on inattentive drivers.
Tesla's Autopilot problems are among a number of issues that have come under scrutiny. The automaker is facing another investigation into the driving range estimates of its cars, which was launched after Reuters reported last year that Tesla had rigged the range meters on its cars to give rosy forecasts. Reuters reported in December that the automaker blamed “driver abuse” for the chronic failure of suspension and steering parts that had long been known to be faulty.
Tesla's image as a climate-friendly innovator has also suffered as Musk's tilt toward right-wing politics and polarizing public statements has alienated some potential Tesla buyers, according to polls and experts.
The automaker reported an 8% year-on-year decline in deliveries on Tuesday, after its main Chinese rival, BYD, reported a 13% increase. Tesla shares fell 5% on this news, deepening the decline of more than 40% since last July, representing a loss of about $400 billion in market value.
However, Tesla's market capitalization of $545 billion is higher than the combined value of the three most valuable automakers, Toyota, Porsche, and Mercedes-Benz. Tesla's stock value has long been based on future expectations for mass market sales and self-driving cars rather than its current sales and profits.
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The cancellation of the affordable car project comes at a time when Tesla and other established automakers have been shocked by the slow growth in demand for electric cars in the United States and Europe, and intense competition in China.
If Tesla had gone ahead with production of the low-cost car, it would not have reached the market until the latter half of 2025, according to company estimates. But the entry-level electric car segment is already crowded with attractive models from BYD and several other Chinese brands.
Tesla has lagged in this sector in part because of the pivotal decision made by Musk. In 2020, after launching its successful crossover, Model Y, Tesla focused on the highly experimental Cybertruck rather than an affordable vehicle.
Musk revealed a prototype of the angular, stainless-steel-covered truck in 2019 and predicted a starting price of around $40,000. The vehicle finally arrived last year, but the lowest-priced version of the truck won't be available until 2025, priced at around $61,000.
The company has also struggled to overcome manufacturing issues, particularly with the truck's leading battery technology. Musk hopes to sell the car in large quantities, but he warned investors last fall of the “enormous challenges” of ramping up production and making the car profitable.
“We dug our own grave with the e-truck,” he said.
During the same period, BYD saw its electric vehicle sales in China rise, growing from about 130,000 cars to more than 1.5 million cars, and this does not include its booming hybrid car business or its fast-growing exports.
BYD already offers a slew of low- and mid-range models, including the Seagull Hatchback for less than $10,000. The Chinese automaker now plans to export that car for more than double that price, but it is still short of the target for the cheap car that Tesla planned to manufacture.
(This story has been corrected to correct pricing information for the Cybertruck)
(Reporting by Hyunjoo Jin in San Francisco, Norihiko Shirozo in Austin and Ben Klayman in Detroit. Editing by Marla Dickerson and Brian Thevenot.)
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